Dollar, bond yields dip amid benign U.S. inflation data

NEW YORK, July 14 (Reuters) - The U.S. dollar weakened and government bond yields fell to multi-week lows on Friday after a benign reading of U.S. inflation in June and soft retail demand raised doubts the Federal Reserve would increase interest rates later this year.

Global stock markets scaled fresh record highs, capping their best week in more than two months, and oil prices gained in volatile trading amid signs of strengthening demand.

The U.S. consumer price index increased 1.6 percent, the smallest gain since October 2016, after rising 1.9 percent in May, the Labor Department said. Year-on-year CPI has been softening steadily since February, when it hit 2.7 percent.

The CPI's drop of 0.1 percent in May and the lack of a rebound last month could trouble Fed officials who have largely viewed a recent moderation in price pressures as temporary.

"The CPI data begs the question, at what point does transitory becomes something that is more sustained, in terms of the softness," said Richard Franulovich, senior currency strategist at Westpac Banking Corp in New York.

The dollar index, which tracks the greenback against six major rivals, was down 0.5 percent to 95.248 after earlier falling to 95.186, its lowest since September 2016. The drop came after the lackluster U.S. data raised doubts about U.S. economic growth and whether the Fed will hike rates again this year.

"This cements the weaker trend in the dollar and lower U.S. yields and I think this story has got legs," he said.

The annualized rate of inflation in several CPI components over the past three months showed declines of 4.9 percent in apparel, 5.5 percent in used cars and trucks and 4.1 percent in professional services, said Heidi Learner, chief economist in New York for brokerage Savills Studley, a unit of Savills Plc.

The data indicates "a little bit of concern about how the Fed is going to normalize policy," Learner said.

YIELDS DROP

U.S. Treasury yields dropped to multi-week lows as the benign inflation data and unexpected fall in retail sales fueled doubts about an interest rate increase later this year.

The benchmark 10-year U.S. Treasury note rose 8/32 in price to yield 2.3212 percent. The 10-year German Bund ticked up almost 1 basis point to yield 0.525 percent.

The dollar index fell 0.4 percent against a basket of currencies, while the euro gained 0.39 percent to $1.144.

The Japanese yen strengthened 0.52 percent versus the greenback at 112.69 per dollar, while the Mexican peso gained 0.48 percent and the Canadian dollar rose 0.31 percent versus the greenback.